Law firms face increased scrutiny from regulator

In a significant move to ensure the protection of client funds, the Solicitors Regulation Authority (SRA) has adopted a more stringent approach to scrutinising law firms. This heightened vigilance follows the alarming £60 million collapse of the law firm Axiom Ince, which was attributed to a substantial fraud incident. The latest findings from business advisers and chartered accountants Lubbock Fine reveal that a considerable portion of law firms shut down in the last year—26.2% of the total—suffered closures due to breaches of accounting rules.

Specifically, 11 out of the 42 firms that faced intervention were sanctioned for accounting violations. Additionally, 28.6% of the closures stemmed from suspected dishonesty. To safeguard clients' interests, the SRA can implement “interventions,” which allow for the seizure of documents and funds, suspension of legal practitioners, and extensive investigations into the firm's activities. The level of intervention has seen a notable rise, with previous data indicating that out of 59 interventions the year before, 27.1% were pursued due to suspected dishonesty, while 18.6% resulted from accounting infractions.

Mark Turner, a partner at Lubbock Fine, noted that since the collapse of Axiom Ince, the SRA has been rigorously monitoring how law firms manage client funds. The situation was grave when £66 million of client money was misappropriated, prompting an urgent need for regulatory reform. "The SRA has been watching law firms and how they handle client funds like a hawk since the collapse of Axiom," Turner asserted. He further emphasised the SRA's intent to prevent similar incidents in the future, adding, "It is looking into problems with client accounts or allegations of dishonesty in much greater detail.”

Common violations of solicitors' accounting rules include the improper mixing of client funds with business funds, delaying the return of client money, and maintaining inaccurate financial ledgers. These breaches can lead to dire consequences for the firms involved. Turner advised that adherence to best practices is crucial. He stated, “With the right policies, processes and being vigilant for things like missed details like incomplete documentation, law firms will greatly improve their chances of having a problem-free audit.” However, he warned that failure to comply could result in serious repercussions whereby the SRA is vigilant for any signs that client money could be at risk, resulting in firm closures to safeguard client assets.